China’s digital transformation

China’s digital transformation

As individual companies adopt web technologies, they gain the ability to streamline everything from product development and supply-chain management to sales, marketing, and customer interactions. For China’s small enterprises, greater digitization provides an opportunity to boost their labor productivity, collaborate in new ways, and expand their reach via e-commerce. In fact, new applications of the Internet could account for up to 22 percent of China’s labor-productivity growth by 2025.

Yet the Internet is not merely a tool for automation and efficiency; it also expands markets rapidly. Greater adoption of web technologies in China could lead to the introduction of entirely new products and services if government and industry take the right steps to maximize the potential (exhibit). A new report from the McKinsey Global Institute (MGI), China’s digital transformation: The Internet’s impact on productivity and growth, projects that new Internet applications could fuel some 7 to 22 percent of China’s incremental GDP growth through 2025, depending on the rate of adoption. That translates into 4 trillion to 14 trillion renminbi in annual GDP in 2025.

Exhibit

The adoption of new Internet applications may have a substantial economic impact in key sectors of China’s economy.

That 10 trillion renminbi gap between the two numbers represents the economic growth at stake. The low end of the projection assumes that the country’s current trajectory continues, with adoption of Internet applications increasing at a moderate pace, under existing constraints. The upper end assumes that China builds a supportive policy environment, individual companies move decisively, and workers adapt to the demands of a more digitized economy.

The MGI report focuses on a set of Internet applications that could penetrate more deeply across key sectors of the country’s economy, including big data; improved demand forecasting, online sourcing, and marketing; Internet banking and payment systems; the Internet of Things; and e-commerce. The six sectors analyzed in the report are already beginning to undergo sweeping changes.

In consumer electronics, for example, the critical factors will be growth in connected devices (such as smart home appliances and Internet TVs) and online media content. China’s fledgling used-car market has enormous room for growth if powered by e-commerce. Chemical companies can use the Internet to enhance their R&D capabilities, enabling collaboration with customers and external experts. In financial services, online money-market funds, discount brokerages, and third-party online marketplaces have already begun to emerge. Chinese home buyers and renters increasingly search online to find the property that’s right for them. More broadly, the Internet is reshaping the market for commercial real estate as e-tailing decreases the need for retail space and increases demand for modern warehousing. And in healthcare, web-based tools such as electronic health records and clinical decision-support systems can elevate the quality of care and play a critical role in making the system more efficient and cost effective.

Increasing digitization is forcing companies across all industries to rethink their operations and become more customer-centric. Owners and CEOs will have to be deeply engaged as they make decisions that can radically affect how their companies do business. Industries will face increasing talent shortages, and larger companies may respond by making targeted acquisitions of tech firms.

From a policy perspective, China’s government faces multiple challenges in harnessing the Internet for economic growth. Building out networks is crucial to bringing more of the population online and facilitating the adoption of new Internet applications, while a balanced set of regulations for data sharing could remove constraints on the adoption of big data. Increased business usage of new Internet applications is likely to have a neutral or slightly positive impact on the total number of jobs—but a more striking effect on the composition of the labor market. The economy will need fewer workers for routine activities that can move online, while demand will increase for workers with digital skills. Government and industry can ease this dislocation by ensuring that training programs are available to help workers continually refresh their skills. China can also adapt school curricula to build digital literacy and create a true education-to-employment pipeline.

Beyond creating economic momentum for China, the Internet will enable growth based on productivity, innovation, and consumption. It will sharply intensify competition, allowing the most efficient enterprises to win out more quickly. The impending shift toward the Internet across key sectors of the economy will pose some risks and disruptions, but it can ultimately support China’s goal of creating a more sustainable model for growth.

About the authors

Jonathan Woetzel is a director of the McKinsey Global Institute, where Yougang Chen is a principal, Michael Chui is a partner, and Elsie Chang and Jeongmin Seong are senior fellows; Gordon Orr is a director in McKinsey’s Shanghai office; Alan Lau is a director in the Hong Kong office; and Autumn Qiu is a consultant in the Beijing office.

McKinsey uses cookies to improve site functionality, provide you with a better browsing experience, and to enable our partners to advertise to you. Detailed information on the use of cookies on this Site, and how you can decline them, is provided in our cookie policy. By using this Site or clicking on ‘OK’, you consent to the use of cookies.